Government Debt, the Money Supply, and Inflation; Theory and Evidence for Seven Industrialized Economies

Aris Protopapadakis and Jeremy Siegel

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: This paper analyzes the theoretical and empirical relation between the growth of government debt and monetary policy for seven industrialized countries: France, Germany, Italy, Japan, Switzerland, the U.K., and the U.S. After analyzing the data we find that:

(i) rates of monetary growth frequently differ sharply from the rate of growth of nominal government debt, so that there is no evidence that a rapidly growing level of government debt encourages immediate monetization;

(ii) the rate of inflation is approximately equal to the difference between the rate of growth of the money supply and real output in all countries over all subperiods, so there is no evidence that an increase in government debt is a significant independent cause of inflation; and,

(iii) 1974 signals a turning point in postwar data trends, marked by a decline in the rate of growth of real output and a sharp rise in the rate of growth of nominal debt for all the countries.

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